As he takes on regulators, is he proving a point — or making trouble?

By James Langton | Janurary 2003

After umpteen hearings and a small fortune in legal fees, Rob Kyle is no closer to getting answers. His lonely battle with the regulatory establishment is either an important endeavour to expose a system operating without proper authority or an expensive, time-consuming exercise in splitting legal hairs.

Kyle has been waging a legal war against the regulators for more than four years now. The conflict was sparked in 1997, when Kyle’s futures-trading firm, Derivative Services Inc., fell into a capital deficiency. The Investment Dealers Association of Canada opened an investigation into the firm in 1998, but Kyle refused to submit to its requests for documents and the IDA initiated disciplinary proceedings against both Kyle and the firm.

Most in the industry probably would have been eager to settle the case and get back to business. But not Kyle. He has waged an all-out legal war that has gone through numerous rulings by the IDA, another three hearings before the Ontario Securities Commission and three hearings at the Superior Court of Justice. These hearings, representing many hours of both sides’ time, endless pages of testimony and hundreds of thousands of dollars in legal fees, hasn’t moved the case any closer to resolution.

The OSC’s latest hearing on the matter was held in October — scheduled for three days, it ran into a fourth — as Kyle’s lawyer, Mary Biggar, raised a host of fundamental questions about the nature and authority of the IDA. Is it a private association or an extension of government? If it’s private, how can it be charged with defending the public interest, and does it have the power to levy fines? If it’s public, does it have to observe statutory limits to its investigative powers and follow rules on how evidence is handled at a disciplinary hearing?

These questions have their roots in the exchanges’ transfer of member regulation responsibilities to the IDA; the OSC’s formal recognition of the IDA as a self-regulatory organization; the OSC attaining rule-making authority; and, the IDA’s increasing reliance on self-regulation. The answers are not merely of academic interest. They could create a nightmare for the industry. For example, if it was found that the IDA hasn’t properly carried out its investigations or doesn’t have the authority to levy fines, it could be subject to a plethora of legal challenges.

Many of these questions were addressed by the Ontario district council of the IDA in 1999. That hearing, chaired by renowned securities lawyer Phil Anisman, rejected all of Kyle’s arguments that claimed that the IDA doesn’t have the jurisdiction and authority to operate as it does. The hearing ruled that the IDA is not “government” and is not subject to the Charter of Rights and Freedoms or other statutory limits on its power.

In October of that same year, Kyle appealed to the OSC. It declined to hear the case, saying that it was premature for it to hold a hearing before the IDA hearings were concluded. When he applied for an OSC review after the IDA hearings were complete, the OSC declined to hear the case, saying that the move for a review was not made within the proper time limits. That decision was appealed to the divisional court, which ruled that the time limit was not enough reason to refuse a hearing, and ordered the OSC to hold this latest hearing.

Five weeks after giving Kyle his audience, the OSC panel — composed of two independent and well-respected lawyers, Lorne Morphy and Robert Shirriff — handed down a brief, two-line ruling indicating its full support for the IDA’s findings: “The Ontario District Council has rendered carefully considered reasons for the above rulings.
We agree with those reasons and, accordingly, this application for a hearing and review is dismissed.” It did not address any of the questions raised in the arguments.

Former OSC commissioner Glorianne Stromberg feels these questions should be dealt with one way or another. “In remaining silent on them, the commission seems to have dodged issues that go to the heart of the efficacy of the self-regulatory regime,” she says. “I would think that the issues raised have to be troubling to the commission whether it has said anything or not.”

OSC general counsel Susan Wolburgh Jenah declines comment on the ruling, referring questions to director of communications Frank Switzer. He says that neither commission staff nor the hearing panel have anything to add to the decision.
They will not be issuing any further reasons, nor will they be explicitly answering any of the questions posed in the hearing.